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Even with apartment rents near record highs, rising construction costs and city fees are slowing down housing development around the Bay Area. In San Francisco, 4,500 new units were completed in 2017, down 14 percent for the year. Completions are expected to fall further based on the pipeline.

Garrett Frakes, partner at brokerage Polaris Pacific, said the entire Bay Area is becoming unattractive for development.

“Capital will move to other markets. It’s very fluid. It doesn’t have to sit here in San Francisco or the Bay Area,” said Frakes. “With plenty of deals where a developer calls us, they’re looking at a parcel. It doesn’t pencil.”

Developers are grappling with construction costs that have risen by 10 percent a year by some estimates, largely in part because of a shortage of labor. San Francisco has the second-highest development costs for all sectors in the world at $330 per square foot, behind only New York, according to a study last year by Turner and Townsend, a construction consultant.

The price of a building one apartment in San Francisco has reached $700,000, including upwards of $100,000 per unit in fees.

Developer AGI Avant’s 299-unit rental tower at 1270 Mission St. was approved last year. It was put on hold as the developer waits for construction costs to come down.

Herzog said the site’s proximity to transportation and jobs will make it a successful project eventually, but for now the company is waiting.

Trumark Urban, the developer behind the Pacific, Knox and Rowan condo projects, has sold all 237 units in the projects aside from one penthouse.

Trumark is still looking for more projects in the Bay Area but focusing on high-end places like Palo Alto rather than San Francisco.

“It’s a very challenging climate,” said Arden Hearing, managing director at Trumark Urban.

Trumark is no longer involved in two projects that it won approvals for: 109 condos at 1554 Market St. and 220 units at 1601 Mission St. Both sites are now controlled by different Chinese-backed developers.

Land prices dropping

Land prices have been falling as costs rise. A few years ago, deals were closing at over $200,000 per approved unit. Some recent sales are still hitting those numbers, but earlier this year, the 1601 Mission St. site sold for $28.5 million, or $129,545 per unit.

“The land market is the most volatile of all the product types in San Francisco. It can change on a dime,” said Kyle Kovac, a sales broker with Newmark Cornish & Carey. “You can double your money without swinging a hammer. Now, it might only be worth what you paid” compared to a few years ago.

“You’re going to see opportunity to buy fully entitled sites at a discount,” said Kovac. “If construction costs come back and normalize a little...maybe in two years, it will makes sense” to build.

Brett Gladstone, an attorney with Hanson Bridgett LLP, said he’s working with multiple clients who have approvals for a total of around 300 units in San Francisco combined. But the projects are stalled because of rising construction costs and fees, he said.

Currently, all rental projects above 10 units must provide 19 percent affordable housing, and all condo projects must provide 21 percent. Those levels will increase by another 1 percent next year under a Board of Supervisors agreement in 2017.

“It’s just a matter of them waiting for a combination of leveling out of construction costs and pricing holding steady or increasing,” said Gladstone, who declined to identify the developers.

Switch to hotels or out of S.F.

Some of Gladstone’s other clients are switching from housing projects to hotels, which aren’t subject to the city’s affordable housing requirements. Others are also seeking to do projects under 10 units that aren’t subject to the fees, but city planning is pushing for more units, he said.

Because of these pressures, some developers are looking south and east.

“I have twice as many clients in the Peninsula as year ago,” said Gladstone, including in Hillsborough and Santa Clara.

Matt Field, chief investment officer at developer TMG Partners, said many developers can afford to wait to build because they aren’t under financial distress and demand is still strong. But the pipeline of new projects indicates a shift of investment outside of San Francisco.

“We’re getting to the part of the cycle where things are expensive. There’s tension in the system,” said Field. “It is forcing development to Oakland. San Jose is definitely having a renaissance.”

The exception is deep-pocketed foreign money targeting the ultra-luxury category, such as at 75 Howard, the only new housing project near the Embarcadero waterfront in years. A Chinese developer paid SRE Group nearly $1 million per entitled unit for majority control of the land. The 120-unit project recently broke ground.

There’s little that city officials can do regarding the labor shortage, but Frakes believes revisiting the affordable housing requirements in San Francisco could help.

Lowrise and midrise projects that use wood are also often able to pencil for developers, such as townhomes in Oakland.

“Wood-frame construction is getting built. Anything that’s concrete and steel right now is having a lot of difficulty,” said Frakes.